Last week I was talking to a good friend who noticed that I’ve not written in a while and he was asking if I had given up on it. I explained that the amount of bad things happening in the world made me feel like I have a hangover thus incapable of working properly, let alone writing. Also, things are changing so quickly that, in a matter of minutes, a newsletter can already be old. This one will probably be old by the time you read it.
Take Brazil, for instance: every day or every couple of days a new arrest, is made, a new “scam” comes to light. A good example is this very weekend, where new information appeared with details about who received what. The Brazilian economy is in bad shape and although the storm seems to be over, I however, think that the worst is yet to come. Take the labor market for instance, or the interest rate. Due to the extreme complex and unfriendly labor legislation in Brazil, Brazilian businessmen are “labor hoarders”. What do I mean by that? It is so difficult to fire an employee that companies don’t make adjustments when the first signs of slow down arrives. They wait until the last minute to fire people, the minute they don’t have a choice anymore. Well, that moment has arrived so my guess is that, we are just in the beginning of the painful road of more unemployment. To be sure, if there is a consistent indicator going up in Brazil that is the unemployment rate which came from 4.3% in January, to 5.9% in March and reached 6.4% in May. That road will bring along social unrest, more violence, more insolvencies, less consumption, and ultimately less investment. Same with interest rate: for the first time since 2009, with the new SELIC at 13.75%, the CDI are yielding 1% per month before taxes. So, what incentive one has to invest in any other asset- being that the stock market, real estate, production - if, without doing anything and very low risk you have that kind of return. Granted, with an inflation at 8% the real interest rate is smaller, but who cares when you don’t have anywhere else to go? As we learned in the past, the increase on interest rate is good for investors and bad for the government as it impacts the public debt and so far has not had a significant influence on inflation. With corruption, inflation, recession as themes, recurrent themes, what else is there to say?
It is under that black cloud of bad news and new accusations that president Dilma arrives in the US to sell Brazil. Who is buying? Not even soccer is bringing good news to the country anymore.
In the old continent, let’s take a look at Greece: this is a drama that is going on for 6 years and the question remains: what will possibly be the end game there? If they fold, it will bring more social unrest, more pain to the population, more hard times. If they don’t, credit will disappear and there will be pain also. Greece has being through 6 years of recession, from 2008-2013, unemployment has risen and finally has stabilized at 29%. That means a third of their population don’t find a job. Now the prime minister decided to hear what the Greeks have to say about a potential deal with creditors, which as honorable as it may seem at first look, shows that he doesn’t have the guts to make a decision. He might have to make that decision anyway, because the troika didn’t “approved” the referendum. So, will the Prime minister capitulate and abandon his electoral mandate or will he lead Greece out of the Eurozone? Whatever happens this week, a couple of things are certain and the first is that there will be more pain and more hard times for the Greek people in any path chosen; also, it will probably cause a hiccup in the markets but not a crisis; stocks will go down for a day, maybe two, maybe a week and countries like Spain, Italy, Portugal will suffer the most. With time, buyers will return to the market, life will go on and good stocks will go up again.
Ignoring Puerto Rico, the US is the only place where good things are happening, but I have been saying that since 2009 so I feel like a broken record. In fact the US has been a bright spot of stability and growth- although small- in a world of recession and unemployment. On top of the vibrant economy we had two great news this week, presented by the Supreme Court: the legalization of gay marriage in all states and the (positive) outcome of yet another health care challenge. I had family visiting and they were amazed by the construction sites: it is construction everywhere, not only NY, it is in Philadelphia, it is in Miami, is on the west coast. Wherever you go somebody is building something, a new position is being created, a young man or woman coming out from college is being hired. Just in my block (and I don’t live in a “cool” place, I live in the boring Upper East Side) a demolition is about to start and I will say good bye to my local Budget rental and a lot of residents will lose their garage as a new skyscraper will replace the old parking lot. In the block opposite to mine another building is being built. Walking towards north on 3rd avenue more sites are being developed. Interesting enough, everybody knows, or should know, that construction is a cycle and it really goes up and down. The story goes more or less like this: there is a shortage of inventory, prices goes up, new buildings are built, than the new units hit the market, then prices stabilize or fall, and then construction declines or stop. In New York in 2015, 6500 new units will hit the market, twice as many as in 2014, the most since 2007. There is no signs of overheating yet, we are still on the ascending part of the cycle. Now, let’s see what is going on with the stock market: it has been a bad year and after 5 years of strong gains the S&P is trading in a range and depending on the day you pick to calculate year to date performance it could be negative or slightly ( very slightly ) positive. Same for the Dow Jones. The NASDAQ is the only one showing positive performance.
If you ready attentively you might be confused and might wondering if I am optimistic or pessimistic. I am very pessimistic with Brazil and Greece, I am skeptical about Europe and China and I am cautious in regards to the USA: there is economic growth in the USA but I think real estate and bonds are illiquid overvalued assets and stocks are just pricey. Enjoy the ride while it lasts.